Worst investment you ever made part II
My last post was about the worst investment you make. In that post I pointed out some major differences between Social Security and a retirement account. I talked about Social Security: how much you’ll pay into it and how little you’ll get in return. Social Security will be the worst investment you
ever made. I also discussed the significant impact of housing costs on your available funds in retirement and a means to reduce that expense.
I’ll pick up where I left off.
Dealing with the housing issue doesn’t mean you now own a home. It means have made plans to reduce your cost of housing after retirement. Maybe you purchased a house or put together a plan to buy one. It could mean you have accepted that in retirement a number of other interests cannot have priority—simply because your funds will be going to housing. Housing is very important, but it will not be your only financial issue. You need to accumulate the funds to support you through retirement.
I want to move on to the topics of saving and investing for retirement.
In retirement it’s difficult, if not impossible, to acquire more funds. It’s imperative that while you are earning a living now, you make some of your money work for you towards supporting your life and lifestyle in the future. The means to having money in retirement is to save and invest now.
That may sound like a “no duh” statement, but it’s so easy to get caught up in the needs of today that you put off taking care of your future. You need to dedicate funds for saving and investing in order to retire with any kind of comfort.
You need a savings account and a retirement account.
Typically a savings account doesn’t yield a high interest rate, but the money in a savings account is easy to get when you need it. A savings account has its place in your financial plan: It’s where you keep money you’re likely to need soon. I realize “soon” is a relative term, but sometimes we need quick access to funds—for emergencies like unexpected car repairs or frequently recurring expenses like biannual insurance payments…
I use a savings account to finance my short term needs. I itemize my expected needs: Read protect everything. My savings account is “home” for my emergency fund, car repairs, upcoming bills, and just about everything else you can think of. I use a spread sheet to keep track of the amount of money I have dedicated to each particular category. This practice helps me keep my money under control. When I say “under control,” I don’t necessarily mean debt free. I mean that I have a plan for these funds and can easily see if I am keeping to that plan. (I know if I’m on target or if I need to take corrective measures—adjust my budget or tweak my plans for upcoming events.) For example, I pay my car insurance every six months. So every payday I put into my savings account a set amount of money dedicated to that bill. When it comes due, I have the money to pay it. I transfer those funds of my checking account and pay my insurance.
I also have dedicated funds in my savings account for replacing my computer. When I purchased the one I use now, I expected it to last about two years. I used the cost of this one as approximately what the new one will cost and divided that number by one hundred and four (2 years/24 months/104 weeks). Every payday for two years I deposited that amount into my savings account and recorded it on my spreadsheet. (Of course that was not the total of my deposit; I have more financial issues than just a computer.) I do have to tell you I’ve been checking regularly on the price of computers and have had to adjust the amount I deposited a couple of times in order to keep current with the expected cost. Anyway, a little more than two years has gone by and as of now my computer is still performing adequately, but I have the funds to purchase one when the time comes to do so. I have that expense and the money for it under control.
When you have the funds for your living expenses under control, it’s time to start investing in your future. Think about it. It doesn’t make sense to have a retirement account if you constantly raid it to solve present financial problems. On the other hand, once you have a working plan for now, it doesn’t make sense to leave your future to chance.
Retirement accounts are widely available. The first place to look is to your employer. Many employers offer a retirement account. They come in a variety of packages: Some are profit-sharing: Some are employee fed only: Some have employer matching funds.
(If your employer offers matching funds, seriously consider taking advantage of it. It’s free money. [insert happy face]) If your employer doesn’t offer a retirement account, there are private consultants that will be happy to help you prepare to meet your future financial needs.
Before opening a retirement account anywhere (and this means at work also), consult a professional. Learn as much as possible about the plan. Know what will be expected of you and what you can expect from your account broker.
Understanding your retirement account
I’m not going into any specific plan details at this point, but it’s important that you know what kind of investments you will be making and what to expect from them. Your account representative should be a good source of information. Also, the internet can provide facts about types of investments and in-depth analysis of company performance.
How much do you need in retirement
How much money do you need to retire? That’s almost like asking how much fun is too much fun. I think we would all agree that we can never have too much money, but how much money do we need to go into retirement?
The real question is how much money do you need in order to live the way you want to? A second question would be what are you willing to settle for?
There is a group of investors that recommends having enough money when you go into retirement to be able to withdraw 4% annually and have that money be enough to live (including paying the taxes on it) for the year. The reasoning behind this is that most retirement accounts pay more than 4%, and if you withdraw less than the money earned, you will never run out.
But I’m starting late…
There are limits to how much you can put into retirement accounts. If you are a late starter or for some reason have fallen behind on your optimum investing schedule, you can think out side of the parameters of your current retirement plan. Make other investments. If your prepare adequately (research, study, and practice—that part can be tricky, but you can make pretend—on paper only—transactions until you understand what you are doing), you can do this yourself. If you are not investment savvy—most of us aren’t—and either lack the confidence or time to become so—you can consult a brokerage firm to help you find investments that will boost your net worth.
We all need to plan for retirement. The first step is to have your current finances under control. When you are ready to start a retirement fund, begin by checking into what your employer offers. Or, you can look for a representative in the personal finance community to help you set up an investment account specifically for retirement. If you don’t provide for yourself, Social Security may be your only source of income in retirement, and Social Security will be the worst investment you ever made. Its return on the dollar is dismal. To have the lifestyle you want in retirement you need to develop an investment plan and work it. Your tomorrow will become “today” sooner than you think.